The WTO and TPP amid the U.S.-China trade war

Robert Azevedo, director-general of the World Trade Organization, will leave the office in August, a year before the end of his term. Behind his sudden resignation is the disfunction of the WTO.

The WTO has two key functions. One is legislative — drawing up new rules on trade in response to economic changes over time through negotiations among the member countries. The other is a judicial — dispute settlement procedures to judge whether member states are following its rules when a trade dispute crops up and to call on violators to correct their behavior.

What's going in the rule-making negotiations at the WTO? The General Agreement on Tariffs and Trade governed goods trade. The Uruguay round negotiations under GATT, which started in 1986 and were concluded in 1993, strengthened rules on agricultural and textile trade — which had been insufficient — and made new rules on services trade and intellectual property rights, areas that had previously not been covered. Out of this the WTO was born.

Under the WTO, the Doha round negotiations started in 2001 aiming at further liberalization. But antagonism between the developed and developing countries brought the talks to a virtual halt in 2011. Although there was a little progress, the talks produced no great changes to the WTO rules agreed on in the Uruguay round talks. Rules that were adopted 27 years ago are still applied without change today. The further liberalization of goods and services trade remains deadlocked and the rules are not attuned to new forms of trade, including e-commerce.

The interests of developed and developing countries also collided during the GATT talks. Brazil and India opposed the launch of the Uruguay round itself as they objected to liberalizing services trade where they lacked competitiveness. The developed countries on their part could not align their policies with each other. The European Union was negative about including agriculture, its cornerstone industry, in the agenda of the talks. The Uruguay round finally started four years after it was proposed by the United States.

A big factor behind the U.S. call for launching the talks was the EU’s agricultural policy, especially its export subsidies that led to lower prices in international markets. The U.S. wanted to introduce regulations in this area. The dispute settlement procedures under GATT were so inadequate that even if the U.S. won the dispute, it could not impose its will on the EU.

What determined the course of the Uruguay Round talks was indeed the agricultural dispute between the U.S. and the EU. Little progress was made as the agricultural issue hijacked the talks, which began in 1986. It was as late as the end of 1992 that the U.S. and the EU struck an agreement on agricultural subsidies, and the talks were concluded the following year.

In the Doha round of the WTO talks, the U.S. and the EU thought that if they could agree on agricultural trade, the whole talks would be successfully wrapped up. Immediately before a ministerial conference in Cancun, Mexico in September 2003 — two years after the start of the talks — the two parties agreed to put a ceiling of 100 percent on tariffs on agricultural imports. But the developing countries led by Brazil, China and India called on the developed countries to drastically reduce their agricultural subsidies. Thus the Cancun conference broke down without an agreement.

In the Uruguay round, the U.S., the EU, Japan and Canada (Australia replaced Canada on agricultural trade) negotiated first. The agreement among the four parties was then forwarded to other participants — first to seven countries, then 13 and next to 21 nations — to reach a final accord. In the Doha round, developing countries objected to such a negotiation method. It should be noted, however, that it is democratic to make a decision in a conference of large numbers of countries, but it's quite difficult to reach a consensus this way.

What influenced the course of the Doha round talks was that China joined the WTO beginning with this round. The U.S. and the EU began to be pushed back by the opinions of the developing countries joined by China, which quickly went on to become the world's second-largest economy. Under this situation the Doha round drifted. It is now almost impossible to establish new trade rules under the WTO.

On the other hand, dispute settlement procedures were much strengthened under the WTO compared with those under GATT and have functioned well in the absence of new rules. But since the old rules remain in force, moves to compensate for the lack of new rules through interpretation have become noticeable. New interpretations have been made, as if to create new laws. Cases also have arisen in which interpretations made by legal experts in accordance with the text of rules do not agree with the intention of the countries that took part in the negotiations. It may be unavoidable to some extent that documents produced by negotiators for the sake of political settlements and compromise in adjusting conflicting interests of various countries are interpreted by legal experts differently from the intentions of the original negotiators.

The U.S. has begun to feel frustrated that the conclusions it desires are not reached due to that kind of judgment by legal experts. It is also unhappy that it takes too long before final conclusions are reached. It has refused to appoint a member of the dispute settlement body. While at least three members are necessary, there is currently only one. Thus the WTO’s judiciary function has also effectively ground to a halt.

Since the WTO is unable to establish new rules, nations have come to explore multilateral free trade agreements like the Trans-Pacific Partnership.

The U.S. under the administration of President Barack Obama initiated the TPP talks. Although it was widely believed that TPP was a mechanism designed to exclude China, the Obama administration’s goal was the opposite. First, high-level rules on trade and investment in the Asia-Pacific region are formulated in the TPP negotiations without China. Since non-participation in a large-scale free trade agreement like the TPP will bring disadvantages, more and more countries will join. Eventually China will have no other choice but to join the TPP and follow its rules. The Obama administration intended the TPP as a mechanism to include, not exclude, China.

U.S. President Donald Trump did not understand this and withdrew the U.S. from the TPP. However, all the things that the Trump administration has demanded of China in the trade war — protection of intellectual property rights, including prevention of counterfeit products; a ban on forced technology transfer in making investment and ensuring the same competitive conditions for state-owned companies and foreign firms — were covered by the TPP.

China has indeed started to show interest in the TPP, as shown by Premier Li Keqiang’s recent positive remarks about it. It appears that the Chinese government has approached the members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

China has a sense of rivalry against the U.S. Because of this, Beijing is rushing to wrap up the Regional Comprehensive Economic Partnership talks with Japan, South Korea, ASEAN members and others even without India, which has indicated it is leaving the RCEP talks. Some Chinese say they want to expedite reform of its state-owned enterprises by joining the TPP — to use external pressure for domestic reforms.

But if China is going to join the TPP now, Beijing will mostly likely demand significant exemption from the rules on investments and state-owned enterprises. In that case, Chinese participation in the TPP could result in the opposite of what the Obama administration intended.

If China announces its wish to join the TPP, Japan will find it hard to reject the bid. But China's relations with Australia, another key member of the CPTPP, are rapidly deteriorating after Beijing retaliated against Canberra's call for an independent investigation into the origin of COVID-19 by curbing the imports of Australian beef and imposing punitive tariffs on Australian barley. Given that Australia is also seeking closer ties with India, it seems unlikely that China will enter negotiations to join the TPP anytime soon.

On the other hand, China's interest in the TPP, which, coupled with the conclusion of the RCEP talks, will increase the Chinese presence in the Asia and Pacific region and may raise the chances of the U.S. returning to the TPP if presumptive Democratic nominee Joe Biden, who served as vice president in the Obama administration, wins the U.S. presidential election in November. Britain is also considering participation in the TPP. The TPP may once again gain attention as a multilateral agreement that complements the WTO.

Kazuhito Yamashita is research director of Canon Institute for Global Studies and a senior fellow of the Research Institute of Economy, Trade and industry.